The 26-year-old has become an integral part of the Hammers team, although he struggled with injury last season as he was limited to just 22 appearances in all competitions.
However, Allardyce feels that the New Zealand international will continue to be key player for his side next season as he overcomes his injury problems.
Allardyce told the club's official website: "He has improved an incredible amount since I arrived at the club to be a very consistent, powerful and important player for us.
"He did get injured quite a bit last year but our whole defensive unit was fantastic. It was a team effort though but we got 14 clean sheets last year, which is the hub of building a successful season but also getting the other right is what were after next season.
"Winston has been a key part of us sustaining our place in the Premier League and hopefully getting better as well."
Reid joined the Hammers in 2010 from Midtjylland.